Q.4 Khan and Jain Limited (K & J) is specialized in manufacturing water tanks. The management of K & J has identified a niche market in certain Southern cities that need a particular size of water tank, not currently manufactured by the company. The company is therefore thinking of producing a new type of overhead water tank. The survey of the companys marketing department reveals that the company could sell 120,000 tanks each year for six years at price of Rs.1,500 each. The companys current facilities cannot be used to manufacture the new size tanks. Therefore, it will have to buy new machinery. A manufacturer has offered two options to the company. The first option is that the company could buy four small machines with the capacity of manufacturing 30,000 tanks each at Rs.115 million each. The machine operation and manufacturing cost of each tank will be Rs.535. Alternatively, K & J can buy a large machine with a capacity of 120,000 units per annum for Rs.500 million. The machine operation and manufacturing costs of each tank will be Rs.450. The company has a required rate of return of 12%. Assume that company does not pay taxes.

Required: Which option should the company accept? Use IRR to give your recommendation and explicitly state your assumptions.